Dollar strength creeps back

The resistance at $1.6260 has proved too strong for the GBP/USD pair and we are currently witnessing a drop below the $1.61 metric as a degree of dollar strength creeps back into the market.

Yesterday’s US industrial production figures beat expectations to trump the pretty dire pending home sales number and help the greenback to bounce back against the main ten currencies. The dollar basket pushed through the 79.40 resistance.

News that UK mortgages in September beat expectations has given the pound a small boost in early trade. This may well add to the notion that the UK property market is displaying ‘bubble’ characteristics. Net lending to individuals was less positive though, falling back to £1.4 billion versus the £2.5 billion expected.

The FOMC statement due tomorrow has traders once again trying to second guess exactly when tapering will begin, and although the consensus seems to be that it won’t happen until at least March of next year, the market has been wrong-footed in the past.

One would think that market participants had learned their lesson in September on the limitations of Federal Reserve forward guidance. Given that we will have two more employment reports between now and the end of the year, we cannot rule out a token scaling back of bond purchases by the end of this year. I would expect that if this does occur the mortgage-backed securities element will be left alone while we could see Treasury bond purchases tapered slightly.

The consumer accounts for around two thirds of the US economy so US retail sales will be closely watched later this afternoon. September figures are expected to rise by 0.1% but anything higher than this could see additional dollar demand.

The EUR/USD FX pair is in an up-trending channel from the July lows so the drop below $1.6120/30 tends to indicate that we may see a weaker pound over the coming days. Support should come at the 50-day moving average just above the $1.59 level. Any pop back through $1.6120 should be viewed as positive for the pound.

Spot FX GBP/USD (DFB) chart

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